The recent hike in pump prices took many by surprise and will burn a hole in their pockets. The government’s commitment to not raise prices further this year is not much of a consolation unless Budget 2009, to be tabled in August, unveils some goodies for the rakyat.
Be that as it may, the hike in pump prices is negative for the banking sector as a higher cost of living will curb loans growth and affect the ability of consumers to borrow and repay.
A report by ECM Libra says most banking stocks nosedived following the announcement of the hike in pump prices on June 4 but recovered marginally the day after. AMMB Holdings was hit the hardest, losing 8.5% week on week in view of the 44% exposure of its loan portfolio to the passenger car or transport vehicle segment.
Malayan Banking Bhd’s (Maybank) 14% exposure to this segment contributed to its shares declining by 1.3% w-o-w. It also has a 21% exposure to the housing loan segment.
Nevertheless, ECM Libra, on June 9, recommended a “buy” on Maybank’s shares, with a target price of RM9.70.
Much of the bank’s prospects are centered around its acquisition of financial institutions overseas, which is expected to bring positive results and secure the bank a foothold in the regional market.
Last month, Maybank proposed to acquire up to 20% of the issued and paid-up share capital of MCB Bank Ltd to be wholly satisfied by cash. MCB enjoys a high net interest margin of 8% compared with the industry’s average of 6%.
The acquisition is estimated to cost at least RM2.9 billion and Maybank has indicated that it will be funded by internally generated funds. With the acquisition expected to be completed this month, its impact will only be felt in FY2009.
The proposed acquisition of MCB will enhance Maybank’s group earnings per share (EPS) by 6.3% or 4.6 sen, says ECM Libra in its report.
It also says that with a 6.1 sen EPS contribution from Maybank’s acquisition of Bank Internasional Indonesia (BII), the group EPS will improve by 14.7% or 10.7 sen.
“Despite concerns of overpaying on a stand -alone basis, the acquisition of MCB is earnings accretive,” it adds.
In March, Maybank announced it was undertaking a massive RM8.6 billion acquisition of a 55.7% stake in BII from Temasek Holdings Bhd.
Maybank, which has been taken to task by some analysts for moving too slowly outside the domestic market, said the acquisition of BII will help it tap the potential in Indonesia’s fast-growing banking sector.
A few weeks before that, Maybank had announced the proposed acquisition of a 15% stake in Vietnam’s An Binh Commercial Joint Stock Bank (ABBank) for RM430 million.
RAM Ratings says these acquisitions will cost Maybank about RM12 billion, but views its expansion into Indonesia, Pakistan and Vietnam as an opportunity for earnings diversification, considering the highly saturated and competitive banking landscape in Malaysia.
It points out that the large populations and low penetration rates in these three countries give Maybank the chance to leverage relatively untapped markets.
Maybank also recently announced a proposed issuance of up to RM7.5 billion in capital funds, comprising both innovative and non-innovative tier 1 capital.
Citi Investment Research says both these are likely to be domestic ringgit issues and that a US dollar subdebt tier 2 was also planned.
It says there is no precedent for ringgit non-innovative tier 1 capital issued by local banks, adding that there is a possibility the issue might not qualify for tax deductibility in Malaysia if it is structured as a preference share.
If there is a US dollar subdebt issue in the works, it will qualify as tier 2 capital and be used to pay for the MCB acquisition, the research house adds.
Citi Investment’s 12-month target price for Maybank is RM7.60.
“We rate Maybank ‘low risk’ based on our quantitative risk-rating system, which tracks 260-day historical share-price volatility,” says the research house.
It adds that key risks that could see Maybank’s stock exceeding its target include overseas acquisitions in Indonesia, Pakistan and Vietnam delivering synergies faster than expected.
According to the research house, Maybank is a heavy index tracker and a liquid blue chip, hence any uptick in liquidity and sentiment in Malaysia will affect its share price.
However, Maybank has reiterated its commitment to paying out 60% of net profit as dividends. Its final dividend will be announced in August, together with its full-year results.
Maybank has said overall, the slightly restrained economic performance will still provide sustained growth in interest income and recurring non-interest income. The group remains confident about sustaining its financial results for the current financial year.
The group’s pre-tax for the nine months ended March 31, 2008, registered an increase of 1.2% or RM34.9 million to RM3.06 billion, compared to the previous corresponding period. For the nine months under review, its net profit was up by 4.7% or RM99.4 million to RM2.22 billion.
Last Thursday, Maybank’s shares dipped five sen to close at RM7.30, with more than eight million shares traded.